Want Booming Wage Growth? Wait Another Year Or Two

Posted On May 8, 2018 2:37 pm


The US labor market has come a long way since the dark days of the Great Recession when unemployment hit 10%. In the latest jobs report from the Bureau of Labor Statistics the government reported that unemployment had fallen to 3.9%, nearly matching the lows seen in April 2000 (3.8%). However that same report also estimated that year-over-year wage growth came in at a disappointing 2.6%. That is pretty much much the level it has been all 2018 and is just a tad higher than the 2.5% average we saw in 2017. The last time unemployment was this low wage growth was running around 4%. In fact 3.5% to 4% wage growth is considered normal for this rate of unemployment. And while wage growth has been inching hire since 2015 it’s been moving at a snail’s pace. 

So understandably many people are confused, and even upset at this anemic pace of wage growth. I’m certainly one of them since my own family has been struggling with these issues so it hits close to home for me.

What explains such slow wage growth? Given the complex nature of the global economy and labor market there are several possible answers, and likely all are partly to blame:

  • Wages are sticky: employers can’t cut wages much in a recession so are slow to raise them during an expansion
  • Fast rising healthcare costs mean total employee benefits costs are rising fast enough to force slower raises
  • Decreases unionization means less collective bargaining power for workers
  • Increased globalization means we are in a world wide labor market and so lower skilled workers must compete with lower wages overseas
  • Faster pace of retiring workers (older workers at peak earnings being replaced by lower paid workers) skewing the data
  • Monopsony (monopoly of job demand from more concentrated firms that have increased market power relative to the past)
  • Sluggish productivity growth (output per worker hour): 1.3% YOY in latest estimate

However here’s the good news. While these are all troubling factors that require addressing (and can’t be solved quickly) there is also a much simpler and likely more important reason to explain the anemic pace of wage growth. Simply put the labor market is very different than what it was in 2000. To understand specifically why this matters you have to understand that there isn’t just one unemployment rate but six. The headline number every talks about is called U3, and it simply measures those people who don’t have a job that have looked for one in the last month. If you looked for a job 31 days ago? Then the government considers you out of the labor force and thus not “unemployed”. There are two other important concepts to know. The first is the labor participation rate which is the number of people age 16 to 64 working or looking for work divided by the non institutionalized (not in prison) population. The other is the prime age participation rate, which is the labor participation rate for just those 25 to 54.

Here’s how these pieces fit together. One of the reasons that the US experienced such strong growth in the 80’s and 90’s was that women were entering the workforce in large numbers. This caused the labor participation rate to rise from 58.1% in 1954 to a peak of 67.3% in 2000. Today it’s 62.8%, just barely off the 2015 low of 62.3%. The decreased participation rate is partially due to baby boomers retiring, as well as a long-term trend in men leaving the labor force due to a changing jobs mix (more service jobs less manufacturing). But here’s what matters to the issue of wage growth and low unemployment. Because of how U3 is measured it is greatly affected by the labor participation rate. For example if we had the same participation rate as we did in 2000 then today’s U3 unemployment rate would be about 10%. Or to put another way today’s unemployement rate isn’t nearly as low as we might first think by just looking at the headline number.

About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

Related Articles

Leave a reply

Your email address will not be published. Required fields are marked *